What is Ethereum?

Before you can understand ethereum, it helps to first understand the internet. Today, our personal data, passwords and financial information are all largely stored on other people’s computers – in clouds and servers owned by companies like Amazon, Facebook or Google. Even this CoinDesk article is stored on a server controlled by a company that charges to hold this data should it be called upon. This setup has a number of conveniences, as these companies deploy teams of specialists to help store and secure this data, and remove the costs that come with hosting and uptime. But with this convenience, there is also vulnerability. As we’ve learned, a hacker or a government can gain unwelcome access to your files without your knowledge, by influencing or attacking a third-party service – meaning they can steal, leak or change important information. Brian Behlendorf, creator of the Apache Web Server, has gone so far as to label this centralized design the “original sin” of the Internet. Some like Behlendorf argue the Internet was always meant to be decentralized, and a splintered movement has sprung up around using new tools, including blockchain technology, to help achieve this goal. Ethereum is one of the newest technologies to join this movement. While bitcoin aims to disrupt PayPal and online banking, ethereum has the goal of using a blockchain to replace internet third parties — those that store data, transfer mortgages and keep track of complex financial instruments. The ‘World Computer’ In short, ethereum wants to be a ‘World Computer’ that would decentralize – and some would argue, democratize – the existing client-server model. With ethereum, servers and clouds are replaced by thousands of so-called “nodes” run by volunteers from across the globe (thus forming a “world computer”). The vision is that ethereum would enable this same functionality to people anywhere around the world, enabling them to compete to offer services on top of this infrastructure. Scrolling through a typical app store, for example, you’ll see a variety of colorful squares representing everything from banking to fitness to messaging apps. These apps rely on the company (or another third-party service) to store your credit card information, purchasing history and other personal data – somewhere, generally in servers controlled by third-parties. Your choice of apps is of course also governed by third parties, as Apple and Google maintain and curate (or in some cases, censor) the specific apps you’re able to download. Take the example of an online document service like Evernote or Google Docs. Ethereum, if all goes according to plan, would return control of the data in these types of services to its owner and the creative rights to its author. The idea is that one entity will no longer have control over your notes and that no one could suddenly ban the app itself, temporarily taking all of your notebooks offline. Only the user can make changes, not any other entity. In theory, it combines the control that people had over their information in the past with the easy-to-access information that we’re used to in the digital age. Each time you save edits, or add or delete notes, every node on the network makes the change. It’s worth noting that the idea has been met with skepticism. Although the apps appear to be possible, it’s unclear which blockchain applications will actually prove useful, secure, or scalable, and if they will ever be as convenient to use as the apps we use today.

Soo, What is Ethereum?

As we explored in “What is Ethereum?”, ethereum aims to function both as a kind of decentralized internet and a decentralized app store, supporting a new type of application (a “dapp”) in the process. But while no one owns ethereum, the system that supports this functionality isn’t free. Rather, the network needs ‘ether’, a unique piece of code that can be used to pay for the computational resources needed to run an application or program. Like bitcoin, ether is a digital bearer asset (similar to a security, like a bond, issued in physical form). Just like cash, it doesn’t require a third party to process or approve a transaction. But instead of operating as a digital currency or payment, ether seeks to provide “fuel” for the decentralized apps on the network. While this might sound complicated, you can think of a more concrete example of how tokens might power a user experience. Let’s go back to the example of a decentralized online notebook. To post, delete or modify a note, you need to pay a transaction fee in ether to get the network to process the change. In this way, ‘ether’ has sometimes been called ‘digital oil’, and taking this analogy further, ethereum transaction fees are calculated based on how much ‘gas’ the action requires. Each action costs an amount of gas that’s based on the computational power required and how long it takes to run. A transaction costs 500 gas, for example, which is paid in ether. As an economic system, the rules for ether’s economy are a bit open-ended. While bitcoin has a hard cap of 21 million bitcoins, ether does not have a similar limit. Of the ether that does exist, 60m was purchased by users in a 2014 crowdfunding campaign. Another 12m ether went to the Ethereum Foundation, a group of researchers and developers working on the underlying technology. Every 12 seconds, 5 ethers (ETH) are also allotted to the miners that verify transactions on the network. Eighteen million ether, at most, are mined per year. Five ether are created roughly every 12 seconds, whenever a miner discovers a block, or a bundle of transactions. So, no one knows the total number of ether yet, and the pace of ether creation will be less clear after 2017 when ethereum plans to move to a new proof-of-stake consensus algorithm. This will probably lead to a change in the rules of ether creation, and thus the mining subsidy might decrease.